The decision by the Swiss to defend their currency and the consequent rise in the gold price (it later eased) has the potential to be a time bomb for the Australian dollar.

While the current focus in Canberra is about leadership speculation, the long-term thinkers in the federal cabinet are deeply concerned at the potential dangers to Australia of a further rise in our dollar, especially given the radical high interest rate views held by some of the Reserve Bank zealots.

I am not in the business of forecasting the currency. There are a clear set of circumstances that would see our currency fall, or certainly not rise. But last night’s events in Switzerland opened the danger of a steep rise in the currency.

Let me take you through the forces in play. As we have been explaining in Business Spectator, a great many European banks now have no capital because of their losses on sovereign debt. Banks no longer trust each other and for good reason. The fall in European sharemarkets mean that governments will need to provide the replacement capital.

And now the European economies are also crumbling.

We are headed for a deep European recession or, even worse, a depression that could see the euro fall sharply. In such a crisis, that normally sends the US dollar up and the repercussions of the European weakness clips commodity prices and our currency. We saw that happening last night, although the Chinese jumped into the copper market, perhaps seeing that as a safe haven.

That is the way it may play out. But here is a second and dangerous scenario. There is unprecedented liquidity in the world, which is looking for a safe haven. The Swiss franc was seen as such a haven and its consequent big rise made it economically impossible to make or do anything in Switzerland that could be undertaken in neighbouring countries. The Swiss were looking at huge unemployment. So they have decided to take on the speculators and will sell Swiss francs to keep a lid on the currency.

There is now only one safe haven — gold. Actually, there may be another one. It’s called the Australian dollar and you actually get paid high rates of interest while you play the speculative game.

I don’t think anyone in Canberra is seriously thinking that we should follow the Swiss, but there is great concern that our interest rates are way out of line with our trading partners. Fortunately, we have on the Reserve Bank board people from the real world and it is likely we will see reduced interest rates later this year.

Again, I am not forecasting that we will replace the Swiss franc as a safe haven — just alerting you to the dangers.

*This article first appeared on Business Spectator